The market was over-bought and it consolidated during the last week. We saw a little profit taking, but the bid has returned. The S&P 500 tested the 20-day moving average last Thursday and it did not revisit that level a second time. This indicates that buyers are eager to get in.
The news this week has been very light. GDP met expectations and initial jobless claims inched higher. The Nikkei declined 5% overnight, but traders ignored the move. Japan’s market is still up 30% in 2013 and prices were getting frothy.
Official PMI’s will be released Monday and the results will be a little soft. We already know this from the flash PMI numbers last week. China’s growth is slowing and the IMF lowered its forecast for 2013. Chinese officials are satisfied with a 7.7% growth rate and stimulus is not planned. Europe is horrible and most analysts are calling for a bottom.
The economic releases will pick up next week. ISM services and ISM manufacturing will be flat. ADP and the Unemployment Report should be stable. This might not sound very exciting, but it keeps Goldilocks alive.
Last week, traders got nervous when they were reminded that the Fed will remove the training wheels once economic activity improves. They won’t stop quantitative easing; they will simply reduce purchases (taper). Keep in mind that they will maintain a huge balance sheet well into the future. The Fed will not become a net seller of bonds for a long time.
Central banks around the world will remain accommodative. Credit concerns in Europe are very low and that dark cloud will not haunt us this summer.
Asset Managers are still playing catch-up and they don’t want to miss this rally. That means that declines will be shallow and brief as they buy dips.
I have been building call positions since last Thursday and I believe the market is poised for another rally.
Look for stocks that are in an uptrend and have consolidated in a range. Buy calls when they breakout. These moves are sustained and they are ideal for option trading. When the momentum stalls, take profits and look for the next trade. If the stock does not follow through and the breakout fails, stop the trade out. This is a very easy rule-based to follow and it has been extremely successful this year.
I’ve been telling you to scale into call positions and you should be in at an excellent average price. We could still see a few days of nervous trading ahead of major economic releases. Hold steady and prepare for the next leg of this rally.
We are still in post-holiday trading and the volumes are light. The market has not moved much in the last two hours. Look for a small upward bias today and tomorrow.